Green Economics I. In their zeal to curtail CO2 emissions, the Greens maintain a number of economic positions. To say that the Greens are economically challenged is probably one of the great understatements of the 20th century. There is an aphorism that the A students in Economics go to investment banking houses; the B students go to civil service and commercial firms; the C students teach; and the D students go to the Green Movement. When you look at the Green track record, you have to wonder if that isn’t a charitable assessment.
Let’s go back a few decades to look at the Green reaction to ideas like pollution taxes. When real economists in the ‘70s suggested various mechanisms to make polluters pay for pollution, they were vilified by the Greens. Anyone who proposed such an idea was dismissed as a mouthpiece for Big Industry and Big Power in trying to deflect environmentalism so that they could continue to do what they always had been doing after paying an inconsequential fine. At that time the Green position was very similar in style to that of the NRA’s – all or nothing. The Greens vehemently opposed any solution that did not involve absolute banning of CO2 emissions, much like the NRA vehemently opposed any legislation that controlled gun ownership in any way.
The Greens have mellowed a bit in this area over the years, so that they now sponsor rational, market-based initiatives for various forms of pollution tax. That’s because governments implemented them, and the Greens looked a little silly in opposing measures that actually did reduce pollution. That brings me to my first example of Green economics. Recently the Greens were in an uproar because the EU decided not to subsidize the price of pollution credits. They made dire predictions of the end of anti-pollution measures and the collapse of the pollution credit market.
The idea behind pollution credits is that industries that reduce pollution below guidelines get credit for that. Then that credit can be sold in a market to industries, like power utilities, that have difficulty meeting pollution guidelines. The real purpose behind pollution credits is not to reduce pollution per se. It is to avoid inequities in industries that require time to install anti-pollution infrastructure as guidelines lower maximum pollution levels over time. If implemented correctly, energy credits do a good job of that, which enables governments to lower pollution level guidelines faster.
The phrase ‘implemented correctly’ is the operative phrase in this context. When energy credits were implemented in much of the EU, the Greens lobbied ferociously to include credits for everything in sight that had any remote effect on pollution, including energy consumption. The problem with this is that it inflates the number of energy credits because, effectively, the producer is already getting credits when the consumers reduce usage. In other words, since the producer is already in the credit market, the credits are being double counted by including consumer credits. That ended up producing an oversupply of pollution credits. With an oversupply, the price of the credits dropped to the point where it was cheaper for power utilities to buy credits than install any kind of anti-pollution measures. So the Green solution was for the EU to subsidize the pollution credit prices with taxpayer’s money to raise their prices enough so that utilities would again start cleaning up.
Ironically, this taxpayer bailout that the Greens backed was designed to solve a problem that the Greens created themselves when they lobbied for an implementation that inflated the number of pollution credits. The proper way to fix the problem is to reduce the number of pollution credits being given out by treating consumer credits as completely separate from producer credits (i.e., consumer credits really are a form of subsidy while producer credits are not).
Green Economics II. Since methanol burns somewhat cleaner than gasoline, a pet initiative of the Greens has been the addition of methanol to gasoline. This is a case of not thinking through the economics. Where does the methanol come from? It comes from various plants that are also sources of food and feed, like corn and sugar cane. When you divert food crops to produce methanol, what happens? The portion of those crops that goes to food and feed is reduced. That means the price of food and feed goes up as reduced supply meets the same demand at a higher price point. Since the relevant crops make their way into almost everything we eat, food prices go up across the board. If you look at supermarket prices, they have doubled in less than a decade. There are people in the third world starving to death today because they can no longer afford to eat. Good work, Greens!
Green Economics III. Some Greens in the EU got a bright idea a few years ago. They argued that wood was a renewable resource and it was carbon neutral (i.e., growing the wood pulled as much carbon from the atmosphere as was returned when it was burned). Therefore, coal-fired power plants should convert to burning wood pellets because burning fossil fuels was not carbon neutral since they just added carbon when they were burned. So in the EU, especially Germany, coal plants have been converting to burning pelletized wood at the rate of about one per week.
There are just a couple of problems with the basic economics of this idea. One is the notion that wood is carbon neutral. It isn’t because it must be cut down, transported, converted into pellets so it can burn efficiently, and transported again to the power plant. All that processing consumes energy, which means more carbon is being added to the atmosphere unless the forest is next to a hydro power plant, in which case you don’t need pelletized wood fuel. Another problem is the notion that wood is renewable. That’s true, but it takes time to grow a tree and with seven billion population we already need a lot of wood. The Greens forget that much of Europe and the Eastern US was completely denuded of trees in the 17th and 18th centuries because of the need to build buildings and provide heat for them. If you completely converted all fossil fuel plants to wood burning, you would probably run out of forests in a decade or two.
But, it gets better. What happens when you divert a substantial portion of existing wood production to generating power? The price of lumber goes up. Go down to your local lumber yard and ask them what has happened to lumber prices since the EU started scrambling to find more wood to pelletize.
Green Economics IV. My personal favorite Green economic debacle is solar panel energy. Back in ’73 the price of crude oil was $3/bbl. At that time the Greens said that solar panels were “almost competitive” with fossil fuels. In ’74, OPEC raised the price of oil to $34/bbl., an order of magnitude increase. In ’75 the Greens said that solar panels were “almost competitive” with fossil fuels. Apparently the Greens employed a large value of ‘almost’. They said the same thing when oil was over $100/bbl and when it dropped back to $60/bbl.
There is a reason that solar panels will never be economically viable in the foreseeable future. The problem is that solar panels require a lot of silica. Mining and fabricating silica is highly energy intensive. About 85% of the cost of a solar panel is energy cost. So if the price of the marginal cost of energy rises, so does the cost of a solar panel in lockstep. In ’74 the marginal cost of energy rose an order of magnitude and, consequently, so did the price of solar panels. That is why they continue – to this day! – to be “almost competitive”. No matter how high the price of hydrocarbon energy goes, solar panels will remain “almost competitive” because you have to build them using the marginal cost energy supplier before you get their energy.
One of the more creative arguments I heard recently is from an old college buddy who enjoys pretending he is a Green to pull my chain. The argument goes that if you bootstrap production using the “free” solar energy from panels to build more solar panels, then the cost of energy will eventually go to zero when all energy produced is solar. Evidently the Greens have employed Charles Ponzi as a consultant, and their economists slept through the lecture on marginal cost supply and demand. I won’t go into the theory from Economics 101, but I will say that solar panels will never become economically viable until at least one of three things happens: (A) we run out of hydrocarbons to the point where they can no longer match world energy demand; (B) enough solar panels are built to satisfy the entire world’s demand for energy; or (C) there is a major technological breakthrough to reduce the energy dependence of solar panel production (i.e., a breakthrough on the scale of the Hall Process for extracting aluminum from bauxite ore).
Recently the price of oil dropped by more than 40% and there has been a flurry of solar panel sales. There are two reasons for this. One is that solar panels are now 40% cheaper than they were, so they can be sold as “bargains”. The other is that governments are subsidizing them with taxpayer money through utility rebates. Thus the boomlet has nothing to do with their economic viability.